Solicitor Accounts

Question 1

What are DR entries?

Answer 1

*expense incurred (outgoings/runnings costs of the business: e.g. rent, bills, staff wages)
*asset acquired/increased
*liability reduced/extinguished
*cash gained

Question 2

What are CR entries?

Answer 2

*income earned
*asset disposed of/reduced
*liability incured/increased
*cash paid

Question 3

What entries will you have e.g. firm buys furniture?

Answer 3

DR: asset acquired + CR: cash paid

Question 4

What is the purpose of the SRA Accounts Rules?

Answer 4

ensure that money belonging to clients is safe and kept separately from money belonging to the firm - they are ultimately designed to reduce the risk of accidental or deliberate misuse of clients’ money

Question 5

What are the key principles of the SRA Accounts Rules?

Answer 5

(1) keep client money separate from firm’s own money
(2) ensure client money is returned promptly at the end of a matter
(3) use client money only for its intended purpose
(4) proportionate requirements for firms to obtain an annual accountant’s report

Question 6

What is client money?

Answer 6

money held or received by a firm:
(a) relating to regulated services delivered by firm to a client
(b) on behalf of a third party in relation to regulated services delivered by firm to client
(c) as a trustee or as the holder of a specified office or appointment, Court of Protection deputy or trustee of an occupational pension scheme
(d) in respect of fees and any unpaid disbursements if held or received prior to delivery of a bill for the same - i.e. money generally on accounts of costs

Question 7

What are the key requirements concerning a client bank account - e.g. how it should be opened?

Answer 7

*opened in the name of the firm + include the word “client” in its title to distinguish it from the firm’s own business accounts
*bank does NOT have any recourse or right against money in a client bank account in respect of any liability of the solicitor to the bank
*client bank account must be at a bank or building society in England or Wales

Question 8

When is a firm not required to have client money available on demand?

Answer 8

where alternative arrangements are agreed in writing with the client or third party for whom the money is held

Question 9

What must a firm do when it receives client money?

Answer 9

*client money must be paid promptly into a client bank account
exceptions:
*money is held as trustee or holder of a specified office or appointment + paying it into a client bank account would conflict with obligations relating to the specified office or appointment
*client money represents payments received from the Legal Aid Agency - firms can take these payments into their own business bank account BUT this does not mean that such money can be held in the business bank account indefinitely
*firm agrees an alternative arrangement in writing with the client or third party for whom the money is held
*where only client money received or held is generally on accounts of costs and firm does not have a client account for that reason: money can be held outside a client bank account, but firm must inform the client in advance where and how money will be held

Question 10

When must client money be returned?

Answer 10

must be returned promptly to client or third party for whom the money is held as soon as there is no longer any proper reason to hold those funds

Question 11

When/how can you withdraw money generally on accounts of costs to pay firm fees?

Answer 11

if reimbursing fees is not expressly stated as a purpose for which client money is held,
(1) you must give a bill of costs, or other written notification, to the client/paying party
(2) this must be done before you transfer any client money from a client account to make the payment
(3) any such payment must be for the specified sum identified in the bill of costs or other written notification and covered by the amount held for the particular client/third party
*bill can include anticipated disbursements which have not yet been incurred + you can leave money in client account or pay such money into firm’s business account

Question 12

What are the risks identified by the SRA of billing future work/disbursements?

Answer 12

SRA does not prohibit billing future work/disbursements, but risks to consider include:
*if the client decides to terminate the retainer and ask for the money to be repaid, can the money be paid back immediately?
*if matter does not proceed, can money be paid back immediately?
*following the incapacity or death of a sole practitioner, can the money be paid back immediately?
*if firm becomes subject to an insolvency event and client’s money is not held in a ringfenced client account, how will the client be able to progress their matter or pay any disbursements due if they have already paid in advance for these and the insolvency practitioner refuses to repay the client’s money because it is held in the firm’s business account?

you are still under an obligation to safeguard such money even if outside client bank account
+ if you consider it is proper to bill in advance having regard for broader obligations, make sure client is fully informed of the risks around their money being received into firm’s business account

Question 13

Where should disbursements which the client will remain liable to pay be received?

Answer 13

should NOT be received in business account (as any risk to firm’s business could result in transaction failing and client having to pay twice as they are personally liable) - e.g. SDLT

Question 14

When can money be withdrawn from the client bank account?

Answer 14

(1) for the purpose for which it is being held - i.e. firm needs to have made it clear that client money in question may be used to reimburse the firm for payments made (this would mean that it can withdraw money without issuing a bill or other written notification of costs) / making disbursement payments is not a breach as it is why money generally on accounts is held
(2) following receipt of instructions from the client or third party for whom the money is held
(3) on the SRA’s prior written authorisation or in prescribed circumstances
*withdrawals can only be made from the client bank account for a client if sufficient funds are held in the account for that client (breaches and errors must be correctly promptly upon discovery and any money improperly withdrawn must be immediately replaced)

Question 15

What can do you if disbursements exceed the amount of client money held for the particular client?

Answer 15

(1) payment can be made from the firm’s business account + money cannot be transferred from the client bank account to partially reimburse the firm unless a bill is issued or the firm made the client aware that it would be used in this way
(2) firm can advance its own money to the client

Question 16

What is a residual client account balance? + what should a firm do in these circumstances?

Answer 16

money the firm has not returned to the client at the end of the retainer and it is now difficult to return the money (e.g. client untraceable/died/client will not accept money)
*firm may withdraw residual client balances of £500 or less on any one client matter from a client account provided the balance is paid to a charity and firm has taken reasonable steps to return the money to the rightful owner (reasonableness will depend on facts - e.g. age of balance, amount)
*for amounts over £500, firm will need SRA authority to withdraw money

Question 17

What must a client bank account not be used for?

Answer 17

client bank account must NOT be used to provide banking facilities for clients or third parties: i.e. payments into, transfers or withdrawals from the account must relate to the provision of regulated services (e.g. to facilitate legal transactions, rather than merely for client’s convenience)
*therefore when asked to make a payment on behalf of client, consider why, whether the client can make/receive payment directly themselves

*failure to comply with this is v serious (likely SDT to impose fine): link with money laundering, offends various SRA Principles (including public interest/trust/confidence) + in insolvency contenxt, allowing a client account to be used as a banking facility allows the client to achieve what would normally be impossible (providing such services would risk favouring one creditor over another)

Question 18

What must a firm’s account records show for each client?

Answer 18

*all receipts and payments of client money
*all payments made on behald of the client from the firm’s own money
*bills issued to the client
[this info must be shown in client ledger account maintained by the firm for each client identified by name and an appropriate description of the matter + balances should be listed (i.e. liability to clients and third parties)]

Question 19

How often are firms required to obtain bank statements?

Answer 19

*must obtain bank statements for all client bank accounts and for the firm’s own business bank accounts at least every 5 weeks
+ firm must prepare bank reconciliation statements for the client bank accounts (i.e. reconciling bank statement and firm’s records): e.g. when a firm makes a payment using client money, this will appear in the firm’s accounting records as soon as the cheque is written but it will not appear on the bank statement until cheque is presented to the bank for payment
*any discrepancies revealed by reconciliation must be investigated promptly

Question 20

How should bills/written notifications be kept?

Answer 20

central record of bills and other written notifications of costs must be kept in a readily accessible form

Question 21

What are the ledger entries to be made when cash is received?

Answer 21

DR cash account + CR client ledger account (business or client section will depends on what type of money is being received)

Question 22

What are the ledger entries to be made when cash is paid?

Answer 22

DR client ledger account + CR cash account

Question 23

What are the ledger entries to be made when a bill is made?

Answer 23

no entry in cash account as there is no movement of cash
on client ledger account: DR professional charges and VAT in business section
on income ledger/profit costs account + HMRC account: CR

Question 24

What will the balance state if client owes firm money?

Answer 24

DR balance on business columns of the client ledger account: client is a debtor

Question 25

How do you record cash transfer from client bank account to business bank account? - e.g. paying firm’s professional charges

Answer 25

(1) record payment from client (DR client ledger + CR cash account [both client section])
(2) record receipt into business bank account (DR cash account + CR client ledger (both business section])

Question 26

How do you record inter-client transfers?

Answer 26

i.e. A to B
*DR client A’s account + CR client B’s account [both client section]

Question 27

What should you do where you receive one payment which contains both client and business money: i.e. mixed receipt?

Answer 27

(1) if bank allows firm to split cheque: DR business portion to cash account [business section] and client portion to cash account [client section ] + CR business portion to client ledger account [business section] and client portion to client ledger account [client section]
(2) receive all money into client account and then transfer business portion to business account
(3) receive all money into business account and then transfer client portion to client account

Question 28

When is there a breach of the Accounts Rules in relation to dishonoured cheques?

Answer 28

*no breach to draw against uncleared cheque (i.e. at payment) - but breach when cheque is dishonoured as more money has been taken from the client bank account than is held of the particular client

Question 29

What entries are made in respect of a dishonoured cheque?

Answer 29

(1) initial payment of client money by cheque
(2) payment from client account (drawing against uncleared cheque)
(3) record dishonouring: make entries reverse of entry 1 - DR client ledger + CR cash
(4) solicitor to immediate transfer money to rectify breach: withdraw from business account + receipt in client account
(5) when cheque is re-presented: mixed receipt

Question 30

When would a firm decide to abate costs?

Answer 30

when client complains that amount of bill is too high - firm may decide to reduce/abate costs

Question 31

How do you record an abatement?

Answer 31

entries made on the profit costs and HMRC account when the bill was sent are reversed to the extent of the abatement (i.e. make DR entry on HMRC/profit costs + CR on client ledger account business section)

Question 32

What are bad debts?

Answer 32

when firm needs to write off the amount owing for its professional charges and VAT and for any disbursements paid from the business account: CR client ledger account (business section) + DR bad debts account
*VAT relief is available once the debt has been outstanding for at least 6 months since the date payment was due: firm entitled to a refund from HMRC: CR bad debts account (with only VAT amount) + DR HMRC (with only VAT amount)

Question 33

How are agent firms to be paid?

Answer 33

must be paid out of business account as professional fees of the agent are an expense of the instructing firm + NOT a disbursement

Question 34

What is output and input tax (VAT)?

Answer 34

output: charged by a business to its customers
input: charged to the business by its suppliers

Question 35

When is VAT chargeable?

Answer 35

VAT is chargeable on the supply of goods or services where the supply is a taxable supply and is made by a taxable person in the course or furtherance of a business carried on by the taxable person

Question 36

What supplies are exempt?

Answer 36

supplies of land (excluding new commercial sales and leases of commercial property where the supplier had opted to be taxable), insurance, some postal services, financial + health services, burial and cremation

Question 37

What supplies are zero-rated?

Answer 37

supplies of food, water, books, international services, transport

Question 38

Who is a taxable person under VATA 1994?

Answer 38

an individual who is registered (voluntarily) or required to be registered:
*a person must register if the value of taxable supplies (not profit) in the preceding 12 months exceed £85,000 for 2023/24

Question 39

What is the general rule on whether prices/fees are inclusive or exclusive of VAT?

Answer 39

deemed to be inclusive unless expressly stated to be tax exclusive

Question 40

What is the tax point for goods and services (used to determine the quarter at the end of which the taxabe person becomes liable to account for output tax on a particular supply?

Answer 40

*for goods: when they are removed or made available to the purchaser
*for services: when they are completed
exceptions:
*if, within 14 days after the basic tax point, the supplier issues a tax invoice, the date of invoice will become the tax point unless a longer period has been agreed with HMRC on issuing invoice (in case of solicitors, there is a general extension to 3-months)
*if, before a basic tax point arises, supplier issues a tax invoice or receives payment, supply will, to the extent covered by the invoice or payment, be treated as taking place at the date of the invoice/payment

Question 41

What is included on a tax invoice?

Answer 41

*identifying number
*tax point
*suppliers’ name, address, VAT registration number
*type of supply + description of goods/services supplied
*quantity and amount payable for each description (excluding VAT)
*total amount payable (excluding VAT)
*rate of cash discount
*rate and amount of tax charged

Question 42

When must a taxable person submit a return to HMRC for VAT?

Answer 42

within 1 month after the end of each quarter: submit completed return form with a remittance for tax due

Question 43

When will VAT be charged on disbursements? + what constitutes a disbursement?

Answer 43

never - disbursements are not part of a firm’s supply of legal services
disbursements:
(1) you act as the agent of your client when paying third party
(2) your client actually received and used the goods/services provided by the third party
(3) your client was responsible for paying the third party
(4) your client authorised you to make the payment on their behalf
(5) your client knew that the goods or services you paid for would be provided by a third party
(6) your outlay will be separately itemised when you invoice your client + you recover only the exact amount which you paid the third party
(7) the goods/services, which you paid for, are clearly additionally to the supplies which you make to your client on your own account
*e.g. IHT, CGT, stamp duty, estate agents’ fees, court fess, land registry fess, incorporation fess, charges for the professional services of a third party
NOT travel expenses or searches which firm uses information to provide advice/report

Question 44

What happens if a firm misclassify items as disbursements?

Answer 44

if they are classified as disbursements, VAT not charged + firm would be understating their VAT and will become liable for the underpayment of VAT with interest and penalties

Question 45

What method is used when invoice for disbursements is addressed to the client?

Answer 45

*agency method
*VAT inclusive amount is simply passed on to the client + no entries needed on firm’s HMRC ledger account
+ send original invoice to client

Question 46

What method is used when invoice for disbursements is addressed to the firm?

Answer 46

*principal method: solicitor must resupply the service to the cient and provide a new VAT invoice
*firm must use business money to pay supplier’s fees with input tax and resupply to client at the same price
(1) CR disbursement and VAT to cash account business section
(2) DR VAT to HMRC ledger
(3) DR VAT exclusive amount to client ledger account business section
when firm issues bill for the work done, VAT on profits costs will be increased by VAT on this disbursement

Question 47

What is a firm entitled to do in respect to fee note provided by counsel?

Answer 47

alter it so that it is addressed to the client + treated on the agency basis

Question 48

What is the rule on the amount of interest on client money which must be accounted?

Answer 48

*firm must account to clients or third parties for a fair sum of interest on any client money held by firm on their behalf, unless a separate agreement is reached with client [it is for individual firms to set their own policy on the cirucmstances in which it is fair to account to clients for interest and how such interest is to be calculated]
*you can, by written agreement, come to a different arrangement with the client/third party for whom the money is held as to the payment of interest, but you must provide them with sufficient information to enable them to give informed consent

Question 49

What is the effect of opening a separate designated deposit bank account?

Answer 49

*likely all interest earned on money will be transferred to client (calculated by the bank)
usually used when firm recognises that they will be holding a substantial amount of money for a significant time and simply want to pass onto the client all interest allowed
*-ve: having a designated deposit bank account for each client may be administratively inconvenient

Question 50

What is the effect of paying client money into a general client bank account (rather than separate designated deposit bank account)?

Answer 50

firm has to pay an appropriate amount in lieu of interest from the business bank account - i.e. firm only needs to pay the client the rate that is fair in relation to the amount held for that client (firm may earn more interest on client money than is paid out to clients)

Question 51

What are the relevant entries when a separate designated deposit bank account is used?

Answer 51

(1) record transferring money from general client bank account to separate designated deposit bank account: CR cash + DR client ledger (client section) [payment] & DR deposit cash account + CR client (deposit) ledger [receipt]
(2) bank will pay interest earned into the separate designated deposit bank account: DR deposit cash account with interest + CR client (deposit) ledger account with interest
(3) banks often do not allow payments directly from deposit accounts = therefore total sum including interest must be transferred from separate designated bank account to general client bank account AND THEN payment can be made from the general client bank account

Question 52

What are the relevant entries when using general client bank account and making interest payment?

Answer 52

(1) can send client cash from client account and interest from business account, or
(2) transfer interest to client account and pay total sum (i.e. client cash and interest) from client account
*to show that interest is owed to client: DR interest payable ledger account + CR client’s ledger account (business section)

Question 53

How must a firm record deposit received + held as a stakeholder?

Answer 53

*must be held in client bank account - but the firm is holding the money jointly for buyer and seller (deposit does not become the seller’s property unless and until completion takes place)
(a) can put money in seller’s ledger + clearly labelled as stakeholder money OR (b) separate ledger account (joint stakeholder ledger account)

Question 54

How must a firm record deposit received + held as agent?

Answer 54

*money belongs to seller alone + to be credited directly into the seller’s ledger account

Question 55

How must a firm record mortgage advance if acting for buyer and its lender?

Answer 55

*firm must be clear for which client money is being held
(a) credit mortgage advance to borrower’s ledger account when received - but details column must include the name of the lender and the fact that it is a mortgage advance OR (b) credit mortgage to a separate ledger account in the name of the lender on receipt + on day of completion, funds become available to the borrower so as inter-client transfer should be made to the borrower’s ledger account

Question 56

Who pays for the work done for lender?

Answer 56

*buyer will frequently have agreed weith the lender to pay the costs charged to the lender: therefore the lender’s debt can be transferred from its ledger account to buyer’s ledger account

Question 57

How can a solicitor/firm operate the client’s own personal bank account + what are its obligations if they do so?

Answer 57

*operate as signatory
*must obtain bank statements every 5 weeks and keep a readily accessible central records of bills and other notification of costs
*must complete reconciliations of the account at least every 5 weeks - but SRA has indicated that it will not consider the solicitor to be in breach provided that they have taken reasonable steps to satisfy themselves that the client’s money is not at risk and recorded the position appropriately (i.e. there might be difficulties in accessing monthly statements to an account belonging to a client)

Question 58

What are TPMAs? + what obligations will the firm be subject to if using TPMA?

Answer 58

*third-party managed account to hold client money, rather than firm operating its own client bank account
*money held will NOT come within the definition of client money as it is not held or received by the solicitor - but solicitor will still be subject to certain obligations with regard to the money under SRA Accounts Rules in order to monitor transactions on the account (e.g. obtain regular statements from provider)
*before decising to use TPMA, firm must comply with obligations to act in the client’s best interest and safeguard client’s money - TPMA must be appropriate in each individual case + client must understand how their money is being held and the difference between protections afforded by the FCA (TPMA) and SRA: complaints should be made to TPMA provider and in accordance with their procedures
*firms are expected to make sure that the TPMA provider is regulated by the FCA
*SRA Guidance indicates that it expects firms to notify it when using TPMA: provide name and SRA number of firm, name of TPMA provider, TMPA provider’s FCA authorisation number + date on which the plans to start using a TMPA as part of its busienss (though permission from SRA is not needed)

Question 59

What are the firm’s obligations in relation to obtaining accountant’s reports?

Answer 59

*firms which have, at any time during an accounting period, held or received client money, or operated a joint account or a client’s own account as signatory, must obtain an accountant’s report for that accounting period within 6 months of the end of the period = report is for accountant to confirm firm’s compliance with rules
- exceptions: where all client money is held/received from Legal Aid Agency or in the accounting period, total balance of all client accounts (including joint accounts and client’s own accounts as signatory) does not exceed an average of £10,000 and a max of £250,000
*report must be signed by an accountant who is a member of one of the chartered accountancy bodies and who is, or works for, a registered auditor
*firm must provide the accountant preparing the report with details of all accounts held by any bank, building society or other financial institution at any time during the accounting period + all other information and document that the accountant requires to enable completion of their report

*accountant report must be delivered to SRA within 6 months of the end of the accounting period if it is qualified to show a failure to comply with the Rules (obligation lies with firm and its managers)

Question 60

When are accountants under a duty to report to the SRA?

Answer 60

must immediately report to SRA any evidence of theft or fraud or where there are concerns about whether a solicitor or firm is fit and proper to hold money for clients or third parties

Question 61

When is a report “qualified”?

Answer 61

not defined by the SRA + depends on accountant’s judgment, but generally the presence of one or more of the following is likely to lead to qualification:
*significant and/or unreplaced shortfall on client account
*systematic billing for fees and any disbursements that have not been incurred and payments in respect of that bill being made into the business account
*evidence of any disregard for the safety of client money/assets
*actual or suspected fraud or dishonesty by the managers or employees of the firm
*accounting record not available of significantly deficient/blank
*failure to provide documentation requested by the reporting accountant
*client account bank reconciliations not carried out
*client account is improperly used as a banking facility

Question 62

When may the SRA require a firm to obtain/deliver an accountant report to SRA on reasonable notice?

Answer 62

where a firm ceases to practice as an authorised body and to hold or operate a client account, or SRA considers that it is otherwise in the public interest to do so

Question 63

What powers does the SRA have against an accountant?

Answer 63

SRA may disqualify an accountant from preparing a report if the accountant has been found guilty by their professional body of professional misconduct or equivalent OR SRA is satisfied that the accountant has failed to exercise due care and skill in the preparation of a report under the Rules

Question 64

What are firms obliged to do in respect of accounting records?

Answer 64

*accounting records: all reconciliations, bank statements, electronic records, accountant’s reports, documents relating to TPMA (i.e. generally accounting records defined widely)
*should be securely stored and retained for at least 6 years